Osborne Prepares Austere U.K. Budget as Political Attacks Ease

Chancellor of the Exchequer George Osborne promised another austere budget as calls to stimulate
the U.K. economy became more muted, easing political pressure on
the government.

Osborne said the problems facing Cyprus are a reminder of
what financial markets will do to nations that fail to act, and
suggested the March 20 annual budget will be free of giveaways.
He promised measures to help the British retirees, military and
diplomatic staff in Cyprus who are affected by the tax on bank
deposits dictated by the island’s bailout.

“There is no easy answer, there is no miracle cure,”
Osborne told BBC1 Television in London today. “We have to go on
confronting the very difficult economic problems.”

Calls for greater action to aid growth from both his
Conservative Party and the Liberal Democrats in the coalition
government have subsided in recent days, suggesting Osborne’s
budget will include measures to appease Cabinet critics such as
Business Secretary Vince Cable. Osborne will have to fund such
actions with cuts elsewhere to stay the course on austerity.

The opposition Labour Party repeated its call for Osborne
to cut value added tax, reduce National Insurance contributions
for small companies and reintroduce the 10 percent starting rate
of income tax. The party’s Treasury spokesman, lawmaker Ed Balls, suggested he would back an income tax cut.

“If he wants to cut the basic rate we will support him in
that,” Balls told the same BBC program.

Cable’s Demands

Ministerial discipline this year contrasts with a year ago,
when details of the budget were leaked as both political parties
in the coalition sought to shape its policies. Cable’s demands
that Osborne deliver a more expansionary budget have dwindled,
suggesting he may have won concessions.

Last week, Cable said the “balance of risks has changed”
and that “the priority has now to be to get the economy
going,” aligning himself closer to Labour than the Tories.

“Once the economy does get going, you generate more tax
revenue, there are less people dependent on public spending, and
the budget then tends to improve itself,” he told BBC Radio 4
on March 11.

Former Defense Secretary Liam Fox, a Tory, on the same day
advocated tax cuts to be paid for by a freeze in government
spending. In a speech last week, Home Secretary Theresa May
opened with an allusion to reports she was a possible challenger
to Prime Minister David Cameron. The Tories are consistently
trailing Labour by about 10 percentage points in national polls.

Household Spending

Osborne today said he wants to see more capital spending
and made decisions in December to increase expenditure on
infrastructure by cutting the budget elsewhere. Osborne also
pointed to an increase in the tax-free allowance announced last
year and that starts in April, giving households an extra 3.3
billion pounds ($5 billion).

“This country has got to pay its way, we can’t just keep
on thinking the answer to our problem is more borrowing,” he
told the BBC. “You can’t get out of a debt crisis by borrowing
more and more.”

While Osborne normally saves the biggest announcement when
he presents the budget in Parliament, he said today that he will
bring forward to 2016 the 72,000-pound limit that the elderly
will have to pay for retirement care. He also promised the early
adoption of a flat-rate state pension.

Osborne has also been considering an overhaul of the Bank
of England’s mandate to give it greater freedom to support
demand. Bank of England Governor-designate Mark Carney earlier
this month met the U.K. Treasury’s top civil servant, Nicholas Macpherson, to discuss possible changes to Britain’s monetary
policy making, said a person with knowledge of the talks.

Gilts Decline

Investors are losing confidence in Osborne’s promises as
budget austerity fails to generate economic growth, leading to
the world’s worst performance for government bonds.

Gilts fell 1 percent this year in currency-adjusted terms,
the biggest loss among 26 indexes tracked by Bloomberg and the
European Federation of Financial Analysts Societies. The yield
on the benchmark 1.75 percent 10-year government note will rise
to 2.45 percent by year-end from 1.95 percent two days ago,
according to the median of 21 estimates in a Bloomberg News
survey.

GDP fell 0.3 percent in the fourth quarter of 2012, leaving
it 3 percentage points below its pre-recession peak, Office for
National Statistics data show. Only Italy, where output was 8
points below, is further behind among Group of Seven countries.

The lack of growth is not only turning investors away from
U.K. assets. It’s also stoking concern among Conservative Party
members that the economy may cost them the next general
election, set for 2015.

Voters are also turning away from Osborne and Cameron. A
ComRes Ltd poll in the Independent on Sunday today showed
support for the Tories was at 28 percent, compared with 37
percent for Labour. The LibDems were fourth with 9 percent,
behind the U.K. Independence Party which had 17 percent. ComRes
interviewed 2,015 adults online on March 13-14.